There is no doubt the BoE will leave its policy stance unchanged in February. The base rate will have been sitting at the rock bottom of 0.5% for nearly seven years, and Ian McCafferty is still seen as remaining the only dissenter voting for an immediate rate hike.
The central view of the Monetary Policy Committee (MPC) appears more balanced, although not all MPC members have recently expressed their views in person on both inflation and the growth outlook.
In light of current market turbulence in China, and the massive drop in oil prices, current views on the inflation outlook in the UK are likely to be skewed to the downside. Oil prices are trading about 32% lower than when November’s Inflation Report was released. Consequently, the world’s major central banks sound increasingly dovish, with the BoE likely to remain overly cautious too.
Robert Wood of Bank of America Merrill Lynch told WBP Online last week that “the BoE is currently firmly in wait-and-see mode. Softer wage growth, global worries, and weaker economic growth than a year or two ago give the BoE plenty of reasons to wait. Weak inflation gives them plenty of room to wait … We look for the first BoE hike in November. The risks are skewed to delay in our view”.
Distribution of power
The balance of views at the MPC has so far been broadly even. On the doves side, we see Governor Mark Carney persistently offering his cautious views on both domestic and external economic and financial market developments. Based on their most recent comments and public speeches Gertjan Vlieghe, Andy Haldane, Ben Broadbent and Minouche Shafik also stand more on the dovish side.
At the other end of the committee’s spectrum are the hawks, with a more upbeat view on domestic price pressures. First is Ian McCafferty, who has been voting for a rate hike since August. Martin Weale may very well join him sooner or later, given his most recent comments on wage pressures. Kristin Forbes and Jon Cunliffe also maintain their views that rates should go up sooner rather than later.
Even though the BoE may revise down the short term outlook for inflation on the back of cheaper oil and weak wage growth relative to November, we may see some rise in annual CPI growth in the first half of this year. This will partly be due to a so-called base effect, when downward pressure from cheaper petrol this year will be softer than last year, and is expected to push up on CPI’s annual change in the months to come, if all else stays equal.
If inflation picks up close toward 1% in the middle of this year, which would be above the BoE’s downside estimate, we may see hawks’ resurrected for a rate vote around that time.
According to the UK national fuel report, petrol prices decreased between December 2014 and January 2015 by as much as 6.3%, while they fell only 2.1% between the same two months a year later. This means downward pressure on CPI will be softer in 2016.
Sterling pass-through effect on CPI
Even though we do not know the exact effect of sterling’s pass-through onto inflation, the most recent depreciation of the pound, mostly against the US dollar, could offset its past rises, and their downward effect on inflation.
In January, the MPC minutes said: “The committee’s best collective judgment at that time had been that protracted pass-through of lower import prices was likely to result in a drag to CPI inflation throughout much of the forecast period. The recent depreciation of sterling, if sustained, would lessen that drag to some degree.”
W B P Online